Sunday, December 02, 2012

Who is serious about limiting taxes?

The only politicians who are serious about limiting taxes are those who are serious about limiting government spending. Any vote for spending increases is a vote for increased taxes to be paid either now or in the future.

Much of the perceived tax burden can be shifted into the future by deficit spending, which means increased government borrowing. By shifting the perceived burden onto future taxpayers, politicians make their current government spending appear to be less burdensome than it actually is. This illusion is compounded by the belief of many voters that someone else is also bearing the direct cost of current taxes.

Where once there was a stigma against indebtedness, especially to excess, this has broken down over the past century. Politicians, recognizing the value of spending to their reelection chances, welcomed any theory that could be used to justify government borrowing. This helps explain the rapid rise in popularity early in the 20th century of Keynesian theories, which appeared to justify deficit spending at least in times of recession. But once the stigma broke down, budget deficits became common even during good times.

During the past four years, the national debt has increased by more than $1 trillion each year. The total debt has now surpassed $16.3 trillion, which is more than six times greater than annual federal tax revenues. “Stimulus” spending came and never went away. Entitlements continue to grow. The trust funds of both Social Security and Medicare are shrinking, and the reduction in FICA tax rates further depletes Social Security and speeds its transition from mock retirement fund to de facto welfare scheme.

As long as we continue to raise the federal debt ceiling, as we will soon be asked to do, we will perpetuate the illusion that government spending is a low-cost way to fulfill our desires. But as government spending grows, it becomes an increasingly worse deal. As the debt grows, it becomes more expensive to service and increasingly difficult to maintain our AAA rating. As the Federal Reserve continues to monetize half of our annual budget deficit, the dollar will continue to decline in value and the risk of rapidly rising interest rates will increase.

None of this was ameliorated by the recent national election, which left us with a split Congress and a big spender in the White House. Worse, that big spender is also a big regulator. While everyone is in a tizzy over what they call “The Fiscal Cliff,” the prospect of unrelenting regulatory interventions puts us on a permanently lower growth path and weakens our ability to raise the revenues necessary to cover the costs of ambitious government.

In this bigger context, the fiscal cliff is more of a molehill. It consists of the “sequester,” which would reduce future spending increases by about $110 billion per year over nine years, and a more significant set of automatically increased tax rates on incomes, capital gains, and dividends.

Anticipation of at least some higher tax rates has already resulted in income shifting that will, ironically, result in higher tax revenues this year but a relative dearth after higher tax rates come into effect. The sequester would have a barely perceptible effect on government spending except that it will fall disproportionately on defense, which is less than 20 percent of the budget.

A more serious approach to budget control was demonstrated by Sen. Rand Paul, R-Ky., who, on entering the Senate two years ago, introduced a well-crafted bill that would cut $500 billion from the budget over one year. His bill was constitutionally sensitive and therefore friendlier to defense than to the federal departments of Energy and Education. But the admirable feature is that the cuts would occur right now, not at some vague future date.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com